GST -The need of the hour

Goods and Services are the two terminal points in any trade and commerce. Though they run parallel and are mutually exclusive, many a times, they blend at a point where they are thoroughly fused together! For example, if activities like teaching are pure services where there would be no involvement of goods at all would be one terminal point, the sale of commodities which are pure goods and where there would be no provision of services, would be the other terminal point. But in cases like construction of a building etc, there will be both, such as services (construction) as well as goods (cement, steel, etc). In such cases, the goods as well as the services would have a meeting point, so intertwined, where the services as well as the goods component cannot be distinguished or bifurcated. At present, having Excise/Customs duties for the commodities and Service tax for the services, the Government has formulated separate mechanisms to deal them separately. It would be relatively easy to tax the terminal points like the pure goods under Excise and pure services under Service tax. But levying tax on the sectors like ready-made garments etc, where both the goods and services are equally and inseparably present, taxing them has always been Herculean task! VAT IN INDIA The foundation stone to the GST was laid by the then Finance minister Mr. V.P. Singh, whereby, he introduced the first comprehensive and milestone set – off scheme under the Central Excise law, called MODVAT (Modified Value Added Tax) scheme in the year 1986. This MODVAT scheme neutralized the cascading effect of tax – on – tax by giving the credit of the excise duty paid on the inputs to be set- off against the duty payable on such final products. This MODVAT scheme, which was introduced to the inputs, raw materials and consumables which were used directly or indirectly used in the manufacture of the final products, was extended to the capital goods in the year 1994. With few restrictions like 50% availment in the first year and the balance in any subsequent years and no depreciation claim on the credit amount, this was the next beneficial extension of the MODVAT scheme. The year 1994 also saw a radical change in the indirect tax domain with the introduction of an indirect tax on services called the “Service Tax” through the Finance Act, 1994. Though introduced to three services like Telephones, Non-Life Insurances and Stock broking in the year 1994, this tax has multiplied like virus and today has near to 200 services in the net. With the tax rate @ 5%, the service tax lived its initial years without the benefit of the set – off schemes. Further, the Central Board of Excise and Customs (CBEC) had also issued certain clarifications in certain services, whereby, it had been clarified that there was no need to pay any service tax by the sub – contractors of the main service providers, if the main service provider is paying the service tax. Hence, both the moderate rate of tax as well as the non – requirement for the sub- contractors to pay any tax, did not either hurt the service tax assesses to cry for any credit scheme nor the Government to think of such a scheme for service tax. Subsequently, with the increase in the service tax rate from 5% to 8% and then to 10%, the service industry started feeling the pinch. Thus, in the year 2002, the Government introduced a “limited edition” of service tax credit and extended it in the year 2003 to all taxable services. The year 2004 has to be hailed as another significant year in Indirect tax administration as this year saw the introduction of “cross-sectoral” credit through the Cenvat Credit Rules, 2004 (CCR). The scheme rechristened as CENVAT credit is a milestone, whereby, the credit of the excise duty/countervailing duty paid on the inputs/capital goods and the service tax paid on the input services were allowed to be used for the payment of excise duty payable on the final products manufactured as well as for the service tax payable on the output services provided. Year 2005 saw the Value added Tax (VAT) being introduced in many States in India, whereby, the set-off scheme was introduced in the State administered indirect tax – Sales Tax! Now with the sound and solid groundwork, India is all set to launch the GST – the TAXATIONEXT! GST – ECO SYSTEM! To me, there are four direct players in this GST game, namely, the Central Government, the State Government , the Trade and last but not the least, the Consultants. Now we shall see the benefits to all of them, sequentially. Firstly, the Central Government. Today, the Centre levies indirect taxes on goods and services, namely the Central Excise duties on manufacture of goods, the Service tax on provision services and the Customs duties on import of goods. In the goods sector, the Centre is now empowered to levy taxes only upto the stage of manufacture. Today, the Centre is not able to levy a tax on the trading of the goods as the Centre is not empowered to tax the SALE of goods but only empowered to tax “MANUFACTURE” as per Entry 84 of the Union List. In other words, the huge value addition in the value chain of the commodities, from the stage of manufacture till the stage of retail trade, is out of the levy of Central Excise. Only the States are today empowered to tax the goods on their SALE upto the retail trade. By this GST, the Centre would be empowered to tax the commodities till the retail point and increase its tax base multifold. An illustration below, keeping a notional GST rate of 10%, would make the proposition lucid and clear. Stage of Supply chain Purchase value of input Value addition. Value of supply made to next stage Rate of GST GST on output Input